What are the most important steps the Government should take to limit energy costs over the long-term?

How can we move towards a position in which energy is supplied by competitive markets without the requirement for on-going subsidy?

Introduction: Focus on cheap reliable energy

Cheap, reliable energy is a foundation for economic growth and prosperity. The government has the opportunity to build a popular mandate for a new approach. Energy costs should not be ‘limited’, but dramatically reduced (Question 27). This approach also eradicates the need for subsidies (Question 28).

Theresa May’s foreword to the Green paper states: ‘Last summer’s referendum was not simply a vote to leave the European Union, it was an instruction to the Government to change the way our country works – and the people for whom it works – forever.’

The Prime Minister is right. Her statement can be applied to energy policy, where a bold change in direction and a clear focus is required. Energy costs could be halved within seven years.

Set a public target to win a mandate

Setting a public target of halving the cost of gas and electricity would be a bold, yet achievable aim. The government could demonstrate that it has a strategy, which supports the development of new industries and directly benefits everyone, through lower gas and electricity bills, especially those who are ‘just managing’.

A decade of green energy policy has had a minimal impact on worldwide CO2 emissions. The climate impact of all Paris ‘Intended Nationally Determined Contributions’ promises are minuscule. If we measure the impact of every nation fulfilling every promise by 2030, the total temperature reduction will be 0.048°C by 2100.1 As Greg Clark states in the Green Paper ‘nearly 10 years on from the Climate Change Act, that framework requires updating’.

One estimate of the cost of implementing the Climate Change Act in the UK is £300 billion between 2014 and 2030.2 Whatever the true figure, we need to ask ourselves if this is the right way to spend a significant sum. Is there a public mandate for this project? Does it support or hinder industrial renewal?

Ultimately, a decision has to be taken on whether energy policy should support the plan to decarbonise energy production now and undermine the British economy or focus on price reduction and reliability of supply.

As Greg Clark states, ‘Leaving the European Union allows – and requires – us to make long-term decisions about our economic future.’ Our challenge is to ‘make the UK one of the most competitive places in the world to start or to grow a business.’

Principles: Cheap, reliable and innovative

Government energy policy should be centered on three key principles: cheap, reliable and innovative.

If this approach is taken, it will provide a clear sense of direction, to the benefit of the whole economy. It will provide an increase in our standard of living and free up resources for investment and improving the quality of life.

Why energy policy is crucial

From ultrasound machines to baby incubators, from data centres to railways, energy is vital to modern society. Increased productivity means a greater reliance on energy. Machines amplify our physical and mental work. Reducing the cost of energy enables society to focus resources and efforts toward other areas of economic and social life. The government’s industrial strategy should include the aim of continuously driving down the cost of energy in the short, the medium and the long-term.

Firstly, a reduction in the cost of industrial electricity enables businesses to reduce the cost of their products and services or increase profits for further investment. This has a direct effect on the creation of jobs. As is pointed out in the Green Paper, energy-intensive industries are particularly sensitive to energy costs. Reducing the cost of producing cement, bricks and steel will flow through to infrastructure projects such as HS2, HS3 and airport expansion as well as house building, vehicle production and robotics. Reducing electricity costs for TFL, the existing train operating companies and future franchises, Crossrail, HS2 and HS3, would enable faster repayment of capital and / or a reduction in fares.

As Karl Koehler, the chief executive of Tata Steel Europe said in March 2016: ‘Energy is one of our largest costs and we are disadvantaged by the UK’s cripplingly high electricity costs.’ As steel production has become increasingly mechanised, the cost of labour has become less important and the cost of energy more so. When steel prices collapsed worldwide, in 2016, the cost of energy become a make or break issue.

The rapid growth of information-based services is driving the growth of data centres. Energy typically accounts for between 25 and 60 percent of the running costs of a data centre. In 2016, data centres in the UK consumed an estimated 2,500 MWh of electricity.3

Secondly, a reduction in the costs of household expenditure on gas and electricity enables individuals to spend income on other goods and services. The effect of reduced energy costs disproportionately benefits families on lower incomes, who spend a greater proportion of income on utilities and basics. Additional income is usually spent, rather than saved, which adds a welcome boost. Subsidies and levies to support decarbonisation can only add costs to household energy bills. On-going price increases artificially suppress consumer spending.

The problem with wind and biomass

Britain’s most buoyant renewable technology is in the form of wind and biomass. Both energy sources require continuous subsidy and act as a drain on resources.

Current energy policy is self-destructive and self-defeating. It simply diverts resources from government, consumers and industry to prop up green energy schemes with no tangible effect on CO2 emissions.

Wind power

Over 7000 wind turbines are now spread across the UK countryside and offshore. They produce about 8 percent of Britain’s electricity. Throughout Europe there are 42,000 wind turbines. For the EU to hit its climate target, a total of 500,000 wind turbines would be required. If the UK were to pull its weight in this enterprise, an area equivalent to the size of Wales would be covered in turbines.

Too many people imagine that wind farms are a one-off investment, which go on to produce energy for free. However, to compensate for intermittency, a reliable energy source is required to produce electricity when the wind isn’t blowing at the right strength. Every wind farm has an equivalent gas power station or other reliable power source as back up. As new wind farms are built, double the investment is required. Most power stations are not designed to be switched on and off, in response the changeable wind, so many are kept ‘spinning’ ready to cope with fluctuations in output from wind farms.

Extra investment is needed to manage intermittency because the performance of wind farms is unpredictable and constantly changing. Wind turbines only operate to 20 to 30 percent of their formal capacity. So, the cost of introducing an intermittent power source is added to the cost of the initial build, maintenance and the infrastructure required to connect remote wind farms to the national grid.

Wind farms, therefore, bring considerable and often unacknowledged cost. There is no saving on power generation infrastructure and additional costs are incurred from the complexity of managing an unreliable system.

It is difficult to identify the precise cost of electricity from a particular source. However, a typical figure for the price for electricity from offshore wind farms is £122 / Mwh and for on-shore wind farms, £84 / Mwh. A typical wholesale price for electricity is £43 / Mwh.

Biomass

Coal-fired power stations are continuing to convert from coal to biomass. Drax power station, in Yorkshire, produces about 8 percent of the UK’s electricity. Drax has six power units, two have been converted to biomass and a subsidy has been agreed to convert a third unit. The Carbon Tax imposed artificially inflates the price of coal to make biomass cheap by comparison. In the UK, the Carbon Tax is currently £23.38 per ton of CO2 emitted (incidentally, the average carbon tax in the EU it is £5.30). This tax makes it ‘cheaper’ for Drax power station to import biomass, in the form of wood chips, from the US and Canada.

The drive to convert coal to biomass has unintended consequences. Although Biomass is classed as carbon neutral, as an energy source it produces double the CO2 emissions compared to gas. Trees are felled in Canada and the US and turned into wood pellets. These are transported to docks, shipped across the Atlantic to Liverpool and loaded on to specially made rail wagons to be transported to Yorkshire. Diesel powers the forestry machinery, the trains and container ships.

In 2016 Drax produced two thirds of the UK’s biomass power. The Contracts for Difference scheme guarantees the price for biomass at £110 / Mwh. A typical price for wholesale electricity is £43 / Mwh.

How to achieve a successful energy policy

The government’s aim should not be to ‘limit’ energy costs (as stated in question 27), but to dramatically reduce the costs of energy to industry and consumers.

If the reduction of energy costs was vigorously pursued, whilst simultaneously investing in R&D for new energy sources, we could provide a boost for industry and address the longer-term challenge for energy.

This can be achieved in the following ways:

1. Carry out a comprehensive review of the Climate Change Act

When the Climate Change Act was passed, in 2008, the costs and implications were neither understood nor debated. Moreover, there was no engagement with the public on the potential costs or the impact of implementation.

Ten years later, we have a better understanding of both the challenges and costs. One estimate identifies total costs of £11.6 billion in 2016. The same report identifies the annual cost to increase to £21.8 billion in 2025.2 Detailed research should be carried out to identify the full cost of the various subsidies, taxes, levies and market manipulations implemented to support the Climate Change Act. The research should be made public to support informed debate.

Regardless of the precise figures, policies designed to implement the Climate Change Act inflate energy prices at an increasing rate. This acts as a brake on the economy and reduces household incomes. Further, the focus on a range of complex initiatives to tackle CO2 emissions diverts the civil service, universities and business planners towards a project that brings no human benefit.

As a nation, we have to ask the fundamental question: Should around £300 billion be spent on propping up and expanding ‘green’ technologies? Or should we invest in new technologies to transform the productivity of our economy, create value and add wealth?

2. Increase spending on R&D

The history of energy production has moved in one direction, until recently. We moved from wood to coal to oil to nuclear. Each discovery and innovation enabled us to create more energy from fewer resources. The relatively recent fashion for ‘green’ energy has reversed this historic trend. Consequently, these usual benefits of economies of scale are not realised. In Germany, the significant expansion of wind-power generation has created grid instability and significant cost increases. Twenty six German power stations are now running at a loss and it is foreseeable that the entire energy sector will be nationalised in the near future to keep the lights on4.

In 1932, the atom was split. 15 years later, in 1945, the most powerful energy source ever invented was publicly displayed in the atomic bomb. If a similar level of commitment was shown to the researching and developing new energy technologies, we could dramatically reduce the cost of energy in the medium and long-term. We could develop expertise and services for export. Comparative advantage needs to be created if we are to reverse our balance of payments deficit. New products and services need to be created if we are to trade successfully on the world stage.

The energy sector is notorious for limited expenditure on R&D. The government should lead the effort for free and open enquiry into new energy sources. Programmes should foster a spirit of open-mindedness to the possibilities of any and all potential energy sources. This approach would boost creative enquiry and provide the potential for radical breakthroughs and the transformation of energy production.

The majority of energy research is currently driven by the narrow aim of reducing greenhouse gasses. University departments compete for research funding on projects that often produce advocacy data, rather than groundbreaking research. The quality, meaning or value of the research is sometimes secondary to the process of winning the grant to fund it. Creating narrow parameters for research grants has narrowed the vision of researchers, it has limited intellectual creativity. Radical thinking and unbounded intellectual exploration is needed.

The government should develop a coherent research strategy that supports academic research that is genuinely open and free. This should range from theoretical and exploratory research to trials of new energy technology.

These could include:

Open-ended research programmes which explore potential new energy sources

Pilot programmes to test new technologies.

Public-private partnerships to incentivise private investment in high-risk ventures. This is the approach taken, for example, in working with pharmaceutical companies. to develop tropical disease vaccines.

The new research institute for battery technology is welcome.

Investment in education to train scientists and engineers working in R&D.

Government procurement and market mechanisms to encourage promising new technologies that reduce the cost of energy and have economies of scale.

Prizes for the achievement of technology thresholds. For example, battery storage.

International collaboration for research programmes. For example, the agricultural green revolution was achieved in this way in the 1970s.

It is estimated that the UK has 25 trillion cubic feet of shale gas. The UK has one of the richest shale gas deposits in the world. There is an estimated £70 billion worth of shale gas in South Wales alone.5

The Brookings Institution estimates that the shale gas revolution has ‘improved the economic well-being of US consumers by $74 billion per year’. The authors estimate that ‘residential consumer gas bills have dropped $13 billion per year from 2007-2013 thanks to the fracking revolution’.6 In Pennsylvania, the state government has generated $1 billion of revenue. In contrast to wind and solar power, shale gas requires no subsidy. Exploiting shale gas in the UK would reduce the cost of electricity and create tax revenues for local and national government.

The techniques of horizontal drilling and hydraulic fracturing are well established, and are indeed bound up in ever more sophisticated IT. 7 The extensive experience gained in the US can be used to ensure safe extraction in the UK. As North Sea oil is wound down, skills can be transferred to the shale gas industry. It is worth noting that the innovative licensing regime established in the 1970s led to massive innovation and the North Sea oil boom. A similar approach, with adaptation to on-shore extraction, could be adopted for shale gas exploitation.

The potential for shale gas extraction is well understood, but the government has been cautious and timid. The government should put the positive case for exploiting shale gas as part of the wider aim of reducing energy prices. Opponents have concentrated their efforts on getting local authorities to reject planning applications. The government could counter by incentivising local authorities to grant exploration and drilling licenses. The government has proposed giving direct compensation to householders directly affected by gas drilling operations. It should go further and divert a percentage of tax revenue directly to each local authority granting a license. In this way, there is a direct benefit for local communities and an increase in funds for local services. Wales, Lancashire and Yorkshire, where shale gas deposits are concentrated, are areas with a history of industry and mining. These local authorities and devolved assemblies should be arguing for shale gas extraction in their areas. Without a clear national aim of reducing energy prices or local benefits, they are opposing shale gas extraction under pressure from environmental activists and lobbyists. The government can turn this around with a clear policy objective and popular backing.

Conclusion

Whilst the majority of climate scientists agree that man-made climate change is a problem, the wider population remains unconvinced and skeptical.8 Given the costs imposed by the current bias towards renewables, it is too easy to blame the big six energy providers. Singling them out is wrong and counter-productive. It hides the truth from the wider population. The public is currently unaware of the real costs of the decarbonisation project, or its negligible effect on CO2 emissions. The government has an opportunity to outline the real costs and benefits as the starting point for new thinking.

Brexit forces the government to make difficult choices. It also provides the opportunity to radically re-think policy in key areas and win a public mandate for a fresh approach. The government could win active public support for reducing energy costs. ‘Halve energy costs in seven years’ could become a policy aim which would win support from struggling families in social housing to the board directors of Britain’s leading companies.

A government policy based on the principles of cheap, reliable and innovative energy can re-invigorate the energy sector and spur innovation in energy production. Cheap energy could act as a spur to inward investment and provide a foundation for increasing productivity. Research and development can be a spur to universities, entrepreneurs and innovators to create new forms of intensive power that is scalable, cheaper and exportable. Specifically, the expansion of shale gas extraction can help re-invigorate communities which are currently classed as ‘post-industrial’.

Cheap, reliable energy is a foundation for economic growth and prosperity. The government has the opportunity to build a popular mandate for a new approach.